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Netflix officials expected to lose about 600,000 subscribers after the 2011 price increase, but 810,000 actually canceled. What reason does the source give for this larger-than-expected loss?
AAn increase in the number of close substitutes
BA steep decrease in the overall US population
CA simultaneous drop in the price of DVDs
DA new government ban on streaming services
Answer & Solution
Correct answer: A. An increase in the number of close substitutes
1. Netflix officials had estimated a highly inelastic response of about 600,000 lost subscribers.
2. The actual loss of 810,000 subscribers was substantially larger than expected.
3. The source attributes this gap to an increase in the number of close substitutes available since Netflix was founded, including Vudu, Amazon Prime, Hulu, and Redbox.
4. More substitutes make demand more elastic than officials had assumed, so subscribers reacted more strongly to the price change than predicted.
5. Nothing in the source ties the gap to population decline, DVD pricing, or a streaming ban.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 5 "Elasticity", section 5.4 | Elasticity in Areas Other Than Price_
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